Think Twice Finance

The Dow: 10,500 by the End of July?

For better or worse, dear reader, I am not going to abandon 30 years of hard experience and 60 years of research by the best scholars the discipline of Finance has to offer and make a forecast. I believe, and the evidence supports that unless you are looking at longer or shorter time-frames than one month, and smaller changes in price than 800 points on the Dow, the best forecast of tomorrow’s stock price is today’s. Somewhat paradoxically, though, everybody knows that today’s forecast is a lousy forecast of tomorrow’s price.

On the other hand, we economists do know something useful about price volatility. To wit, in a market like this one, where the price is doing the latin boogaloo, it is going to continue to fluctuate in the near future (the next few months or so at least.) So the chances are good that we’ll be dancing in the streets or weeping in the back pew by the end of July.

So let us review. Most likely nothing will happen. But this most likely single event isn’t very likely. It is more likely that among the myriad of possible good things can happen and the myriad of possible bad things that can happen, whichever, some of them will happen.

This brings us to my point. If I were not myself, a man steeped in hard experience and financial wisdom, I would forecast a major decline in the market here. 10,500 seems wildly irrational to me, but possibly even a little conservative to that other guy. Call him Not Myself.

Not Myself asks, “What can happen in the intervening month?” He comes up with following list:

• We capture Osama Ben Laden.
• Osama Ben Laden Blows Up the European Commission Headquarters.
• The Iraqis ask “What could we have been thinking?” and become the 51st state.
• The price of gasoline falls to $50 (which is still too high.)
• The price of gasoline rises to $200.
• Congress Passes “important new legislation.” It doesn’t work. (Some of these possibilities are more likely than others.)
• Half the homeowners of the world let their mortgages default and buy each other’s foreclosed homes. (see “Cyprus Problem” in Google.)

Of course, the list is a little partial and tentative. And I myself am not sure whether any one of these things would be good or bad for the market. However Not Myself just plunges on. He thinks that that bad stuff is going to happen, even if it’s not the stuff listed above. He even thinks the market has been levitating for at least six months. So Not Myself says “Dow at 10,500 by the end of July.”

But don’t ask me, for I am steeped in experience and study the experts in Finance, so I Myself have no bloody idea.